India needs 15-year money to build its infrastructure, mutual fund CEOs say

According to fresh market updates, India needs to build a deeper pool of long-term domestic capital to finance infrastructure, urban development and other projects that may take more than a decade to generate returns, mutual fund industry leaders stated at the Moneycontrol Mutual Fund Summit in New Delhi.

Although India’s mutual fund industry has expanded rapidly, much of that expansion has been concentrated in equities. The industry is yet to develop enough products and investor pools capable of committing capital for 10 to 15 years or longer, the panel stated.

“The need for long-term money for capital creation or infrastructure building and everything that we want to build in this country, better cities, urban development, all of that, they are all long-gestation projects which need long-term money,” stated Navneet Munot, managing director and chief executive officer of HDFC Asset Management Firm.

Munot stated the financial system has historically faced asset-liability mismatches when money boosted for shorter periods was used to finance projects with long repayment cycles.

Private credit and other investment vehicles could help narrow that mismatch by raising capital through closed-ended funds with tenures ranging from four to eight years, he stated. Such structures would allow the duration of the investment product to be aligned more closely with that of the underlying asset.

Why open-ended funds may not be enough

Radhika Gupta, managing director and chief executive officer of Edelweiss Asset Management, stated the industry should reconsider its reliance on open-ended products when investing in assets that require patient capital.

“Not everything needs to be open-ended. So we additionally need to rethink mutual fund as a purely open-ended platform,” Gupta stated.

She cited Bharat Bond as an example of how the right product structure could build demand for longer-duration investments. A Bharat Bond 2030 fund that initially struggled to mobilize Rs 3,000 crore has since grown to around Rs 25,000 crore to Rs 27,000 crore, she stated.

“Why can't you do a 15-year closed-ended infra-bond fund? And why can't the Government of India work on structures like that?” Gupta asked.

Developing such products would require taxation, regulation and secondary-market liquidity to work together, she further noted.

Building the long-term investor base

Nilesh Shah, managing director of Kotak Mahindra Asset Management Firm, stated creating long-duration products would not be sufficient unless India additionally expanded the pool of market participants seeking assets with similar tenures.

“Let's first create the market participants who have long-term asset requirements, like insurance firms, pension funds, provident funds and charitable trusts. If there is investor demand, the market will create products,” Shah stated.

He called for provident and pension funds to be given greater flexibility in managing bond portfolios, including the ability to sell securities during their tenure instead of being restricted by rules triggered by credit-rating downgrades.

The panel additionally identified real estate investment trusts and infrastructure investment trusts as vehicles that can connect operational assets with a wider investor base once projects begin producing steady cash flows.

Munot stated these instruments could backing a financing system in which different market participants provide capital at different stages, from project construction to the operation of completed assets.

The central task, the panel stated, is to align the maturity of India’s domestic savings with the long timelines of infrastructure and capital-creation projects.